For several months now, the perception, at least, is that the frozen commercial property sales market is thawing. Now there is some basis for that notion grounded in reality.

 

Some $9.7 billion in properties valued over $5 million traded in June, according to New York-based researcher Real Capital Analytics. That’s the highest volume since September 2008.

 

So what’s happening exactly?

 

RCA notes that U.S. investors brushed off concerns about the sputtering economic recovery and its potential impact on the commercial real estate sector.

 

Certainly despite more recent fears of a “double dip” recession, sales velocity has increased of late, pushing total volume for the second quarter to $20.6 billion, up by 32% from the first quarter.

 

Sales in the first half of the year totaled $36.2 billion, which is an 11% improvement over the second half of 2009. It’s also a huge 67.1% gain over the first half of 2009. The gain is smaller when measured by the total number of transactions, up just 6% between the first half of last year and the first half of 2010, at a total of 1,790 properties. That means the average transaction size has increased.

 

According to RCA, several large corporate portfolios sales accounted for a disproportionate share of total volume in the first half of 2010, particularly in June, when volume was up significantly across the core sectors.

 

The 31-property iStar Financial portfolio, purchased by Dividend Capital Trust for $1.3 billion, accounted for 14% of June’s total closed volume. Other large June sales included several high-profile office buildings such as 300 N. LaSalle in Chicago ($655 million), 340 Madison in New York ($570 million), and the Wells Fargo Building in San Francisco ($333 million).

 

Generally speaking, the trendline shows that larger properties are trading at lower cap rates, which have seen their largest declines on apartment, industrial and retail properties.

 

Nationally, average apartment cap rates fell by approximately 25 basis points between the first and second quarters, to an average of 6.8%. Over the same period, average industrial and retail cap rates fell by approximately 35 basis points and 20 basis points, respectively.

 

Office cap rates, which had fallen by more than 100 basis points in Q1’10 from their peak in Q4’09, held steady in the latest quarter, declining by less than 10 basis points to 7.9%.

 

It’s perhaps not surprising, given the slower pace of economic recovery, that most deals are being done in so-called “top tier” coastal markets, including Washington, D.C., New York and Boston. There, investors are bidding up the few top-shelf investment-grade properties that have come to market.

 

Washington, D.C. reported an average office cap rate of 6.4% for the first half of 2010, while Baltimore, just to the north, saw an average office cap rate of 9.0%.

 

The New York and Boston metros each reported over $1.5 billion in total volume in the first half of 2010, corresponding with year-over-year sales increases in excess of 100%. At least one inland Midwest market, Chicago, posted similar results as these two coastal cities.

 

When it comes to pricing, the picture was mixed. Here are a few tidbits to consider, according to the most recent (June) Moody’s/REAL Commercial Property Price Index report:

 

Still, one of the biggest question marks overhanging the commercial property sector has not materialized. Where is the tsunami of distressed sales (nearly) everyone has been expecting? Simply put, it’s not here just yet.

 

As a share of total volume, sales of distressed properties slipped in the first six months of 2010, from 21% in the first quarter to 10% in the second quarter. In June, distressed sales accounted for less than 10% of all sales activity. The higher volumes of distressed sales in the first quarter reflected several large corporate portfolio workouts.

 

On a “positive” note, more than 25% of all apartment sales in June were classified as distress, the highest share for any property type. This is good news in the sense as fundamentals for both apartments and hotels are showing early signs of stabilizing, lenders may loosen their grip on these assets over the coming quarters.